Question
Asked Sep 29, 2019
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there are 4 consumers willing to pay the following amountd

a-7 b-2 c-8 d-5

there are 4 haircutting firms with the following cost

e-3 f-6 g-4 h-2

each firm has a capacity to produce only one haircut. for efficiency, how many haircuts should be given? which business should cut hair cut ?how large is the maximum possible total surplus? explain with diagram

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Expert Answer

Step 1

Consumer’s maximum willingness to pay is called reservation price. From the producer’s point of view, it is the minimum price at which he will be willing to sell goods. Figure 1 shows the demand and supply of hair cuts at the given reservation prices.

Step 2

From the figure, at three haircuts, demand and supply curves meet. Thus, for equilibrium 3 hair cuts should be given between price 4 and 5.

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Price of haircuts DEMAND CURVE C 8 А 7 F 4 в Е 2 1 Quantity of haircuts 2 SUPPLY CURVE Figure 1 H.

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Step 3

Now, since consumer B’s willingness to pay is too low and firm F’s cost is too high. Therefore, they would not...

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